How the government is losing billions from unlicensed individual lenders

In 2019, BOT issued regulations requiring non-deposit individuals accepting Tier 2 lenders to apply for licenses for their operations, but compliance has remained very slow, especially in rural areas.

Through Government Notice Number 679 issued on September 13, 2019, BOT issued the regulations, which emphasize stability, consumer protection, capital requirements and best practices in the market for loans without deposits.

According to the regulations, people without a deposit are required to apply for licenses with a non-refundable application fee of 300,000/-, but many are currently operating without a license, depriving the government of billions of shillings.

The regulations also require that a small licensed individual lender has a capital of at least 20 million/-, but currently people with a lower amount openly run these businesses through the office of local government authorities. .

The survey by The Guardian showed that there are many individual lenders currently giving loans to people, with interest of up to 30% in a month.

This means that lenders earn 300 times for every 100/- borrowed each year, which is 15 times higher than market rates charged by commercial banks and licensed financial institutions or savings and loan organizations.

Other lenders in rural areas provide loans to farmers a few months before the harvest, with the harvest used as collateral until harvest, when the lenders take part of it in repayment of the loans.

It comes at a time when farmers lose nearly all of their crops to lenders in the event of debt accumulation or non-payment.

One of the unlicensed lenders who spoke to The Guardian said he earned up to four times the amount invested because each loan is repayable within a month of borrowing.

“It’s a good deal but sometimes it’s very risky,” said a lender, who preferred to speak on condition of anonymity.

A lender said that he started a credit business with a capital of 2 million/- three years ago, lending to women managers of small businesses and that he had earned a gross income of up to 7 .2 million/- every year.

“This business is so risky because sometimes we end up losing some of the borrowed money because others don’t use collateral while borrowing, which makes it difficult to collect because most of it is issued in an unsecured way. secure without any security,” he said.

Depending on the lender, borrowers are sometimes required to provide security for a loan, which includes household appliances such as a sofa, TV, title deeds, or bed/mattress, and in the event of non-repayment, the properties are auctioned off to recover borrowed goods. amount.

“We don’t sell these collateral at a mark-to-market price, but at a price that we believe is equivalent to the amount borrowed,” he said.

When asked why it was operating without a license, one lender said it could not because it believed that exposing businesses to authorities would result in paying taxes, which it does not. was hardly trying to avoid.

Mariam Issa (34), a resident of Tabata, said she lost some of the devices that were sold after failing to repay the 500,000 borrowed from an individual lender.

“I borrowed the amount to run a small business which then went bankrupt due to circumstances I faced at the family level, and I had nothing to do but allow my properties to be sold,” said she declared.

She said she failed to repay 650,000/- including 500,000/- principal and 150,000 interest in one month, before dropping to 650,000/- principal with 180,000/- interest in the second month.

According to the regulations published on the BOT website, all service providers are required to maintain a capital of 20mn/- or more, with no more than 100 borrowers.

The regulations require all individual lenders who will exceed 100 borrowers to apply for a license as an institutional lender with an application fee of 500,000/-.

The regulations stipulate that small targeted individual and institutional lenders will be allowed to offer a number of services, including housing micro-loans for individuals, distribute loans issued by government lending programs, invest in the capital and to provide an insurance agency.

Actors will also be required to prepare quarterly financial statements and annual financial reports, which will be submitted to the BOT, while providing training to employees involved in lending activities.

The Guardian investigation also showed that there are other individual lenders who use money borrowed from commercial banks with low interest and long-term repayment to lend short-term to small borrowers.

For example, an individual lender can borrow one million shillings for one year at an interest rate of 20% per annum from the bank, but can use the same amount to earn up to 3.6 mn/-, which translates into a net profit of 2.6% mn/-.

According to the regulations, individual lenders who existed before the new regulations were given a one-year grace period to register their business or get rid of it.

However, due to the lack of supervision, there is a mushrooming of individual lenders operating their businesses with the help of local government authorities.

Local government authorities or village chairmen’s offices have been used as guarantors for borrowers, and some receive small additional fees from lenders.

People familiar with the business said some village or urban local government leaders earn a signing bonus of up to 10,000/- for each individual borrower.

Local government offices are also used for reconciliation, in case of default or late repayment of funds borrowed from individual lenders.

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